What is a Credit Card

Credit card – a small plastic card issued by a bank or building society, allowing holder to make purchases on credit.

(South African Concise Dictionary 10th Edition)

Just about everybody has at least one of these indispensable little plastic rectangles nowadays. But, although we know what to do with it, very few of us know how credit cards ‘hang together’ and how this all popular form of payment initially came about. Perhaps this will help fill the gap.

How Credit Cards ‘hang together’

The Credit Card Associations:

At the top of the heap, are the credit card associations: Discover, American Express, Visa and MasterCard. Credit card associations are in essence global payments networks that support the issuing, acceptance, transacting and usage of credit cards. By belonging to a credit card association, banks are able to issue credit cards that are accepted by hundreds of thousands of merchants and ATMs world wide. In South Africa, the majority of the banks belong to Visa and MasterCard. That is why either the Visa or the MasterCard logo appears in the bottom right hand corner on most of our credit cards.

The main difference in approach between Visa and MasterCard; and Discover and American Express, is that Visa and MasterCard don’t issue their own credit cards. Discover and American Express are credit card associations who also issue their own credit cards and charge cards.

The Card Categories, Sub-Categories and Types.

The two main categories of cards on the market today are credit cards and charge cards. When you use a charge card, you will need to settle your balance in full at the end of every month. Credit cards, on the other hand, allow you to pay off your balance over time.

Under the two main categories, namely credit cards and charge cards, there are three subcategories: personal cards, business / small business cards and corporate cards

In each one of the subcategories, there are several different card types: Rewards cards, Basic cards, Affiliation cards, Travel cards and Entertainment cards, amongst others.

Your credit card is essentially a revolving line of credit that you activate each and every time you swipe your card. This is not unlike the first credit card that was launched in the post-World War II years.

The Birth of the Credit Card

It was the Americans who invented the credit card fifty eight years ago. In 1949, a New York businessman (Frank McNamara) discovered that he had left his wallet at home while hosting a dinner at Major’s Cabin Grill. Embarrassed, he offered the restaurant owner (whom he knew) his business card as a promissory note. When the owner accepted the card, it gave Frank the idea to create a kind of charge card, with which well-to-do customers could pay for their expenses at various establishments. Frank would pay the establishments for the purchases made and, as compensation, keep a small percentage of each sale as compensation.

In 1950, Frank and his partners, Ralph Schneider and Casey Taylor, returned to Major’s Cabin Grill. After a quiet dinner, Frank signed the bill and offered a small card made from cardboard, as method of payment. He explained the idea to the restaurant owner and asked him how much credit card business would be worth to him. The reply was: “7%”.

In later years, this day, which saw the birth of Diner’s and the modern credit card, would become known as “The Last Supper”.

The Credit Card in South Africa

All indications are that the first credit card found its way into South Africa when the Netherlands Bank of South Africa (now Nedbank), issued an American Express Gold Card in 1967. This did not herald the start of a credit card rush though. Wary of debt, the Baby Boomers who were entering the job market, generally kept clear of this payment method. It was only some ten years later, when the credit card industry saw meaningful uptake.

Credit card use in South Africa has increased exponentially since those early years. Projections are that 2007 may have produced close on 100 million more credit card transactions than during 2005, and that by the end of 2007, South African credit card holders may have chalked up a massive R 40 billion in credit card debt.

Within the space of thirty short years, the South African credit card industry has indeed become a colossus.